The Good, the Bad and the Unknown of Gov. Wolf’s 2018-19 Budget Proposal

The 2018-19 Fiscal Year budget address delivered by Pennsylvania Governor Tom Wolf yesterday was short and sweet. While recognition of the Philadelphia Eagles’ recent Super Bowl victory opened the proceedings with a unified and celebratory tone, it was not long until partisan differences emerged in this first stage of the annual state budget process. Despite his brevity, Governor Wolf did announce some ideas and proposals that would directly impact Pennsylvania taxpayers in a variety of ways.

The Good: No broad-based tax increases

Pennsylvania residents should be glad to hear that the Governor did not propose any broad-based tax increases. The 2018-19 budget address does not contain the broad-based tax proposals included in recent budget years, such as increases in the personal income tax, sales and use tax rates and possible sales and use tax base expansion on various services. Given how many state officials are up for re-election this year, it is not surprising that tax increases on residents were taken off the table.

In addition to personal taxes remaining at current levels, the proposed budget should also please the education sector with its call for $225 million in additional spending on early childhood, special education, basic education and career/technical training.

The Bad: Proposed natural gas severance tax

Although residents of Pennsylvania avoided possible tax increases, the oil and gas industry was not so lucky. Governor Wolf spent a significant amount of his proposed budget address calling for a severance tax in Pennsylvania. In the post-address commentary, however, it became clear that the Republican leadership will not be lending their support for this proposed tax.

The main concern regarding the severance tax is that increased taxes on the oil and gas industry could lead directly to lesser investment into the Commonwealth and a possible reduction of Pennsylvania jobs. It should also be noted that the industry is contributing to Pennsylvania’s revenues through current impact fees, corporate net income tax, sales and use tax and personal income taxes. Just because Pennsylvania is the only state without a “severance tax” does not mean one should be enacted; in fact, several analysts noted after the address that the absence of such a tax could be a differentiator in attracting more investment and keeping jobs in Pennsylvania.

The Unknown: Conformity with Federal Tax Reform

Governor Wolf’s mention of the possible location of Amazon’s second headquarters in Philadelphia or Pittsburgh was another headline of the address, since attracting an employer the size of Amazon would be a win for the Commonwealth.

Decisions by large companies such as Amazon to relocate and/or expand their footprint within the Commonwealth may be directly related to how Pennsylvania applies and treats the recent federal tax reforms. Pennsylvania already has an uphill battle in attracting corporations into the state based upon its 9.99% corporate tax rate, but this rate coupled with how Pennsylvania reacts to federal tax reforms could turn the uphill battle into a nearly impossible feat.

Due to the healthy amounts of repatriated cash businesses will experience thanks to federal tax reform, states are going to be incredibly competitive in attracting additional expenditures within their borders. A prime example of this competition is how states will treat 100% bonus depreciation. A recent position implemented by the state Department of Revenue (DOR) places Pennsylvania significantly behind most other states. Not only will the DOR not allow 100% bonus depreciation, the department will not provide for any depreciation for Pennsylvania corporate net income tax purposes until the year of disposition. As feedback to this DOR policy flows in from the business community and the General Assembly considers legislation to address this and other federal tax conformity issues, it is clear that short-term decisions may have long-term effects on the entrepreneurial landscape in Pennsylvania for years to come.

RKL’s State and Local Tax team closely tracks state budget negotiations, along with all proposed legislative efforts, for taxpayer impact. Readers with questions about the Governor’s latest proposal or Pennsylvania tax matters should contact me at jskrinak@rklcpa.com.

Contributed by Jason C. Skrinak, CPA, Leader of RKL’s State and Local Tax Practice. Jason applies his deep expertise to identify and pursue tax-savings opportunities for clients, ensure their compliance across state and municipal borders and resolve controversies they may have with taxing authorities.